EUR/CAD extends its losses for the second successive day, trading around 1.6040 during European hours on Tuesday. The currency cross depreciates as the commodity-linked Canadian Dollar (CAD) gains support from rising crude oil prices.
Oil markets are strengthening as traders manage heightened uncertainty surrounding global supply, particularly with Saudi Arabia’s East-West pipeline remaining shut following drone attacks and no clear timeline for when operations will resume.
Economists at Royal Bank of Canada highlight that "Canadian inflation held at 3% year-over-year in August, unchanged from July," noting that the latest print underscores a steady headline pace even as underlying pressures continue to ease. Against this backdrop, RBC’s Abbey Xu points out that core measures remain close to the BoC’s 2% target, reinforcing the view that policy is likely to stay unchanged for an extended period, with any shift in the outlook hinging on how persistent recent strength in Oil prices proves to be.
However, downside pressure on the EUR/CAD cross may be limited by potential strength in the Euro (EUR). A series of European Central Bank (ECB) officials have warned of persistent upside inflation risks, driving expectations for further monetary tightening. This hawkish sentiment follows the ECB's recent decision to raise its key policy rates by 25 basis points as anticipated while signaling that additional rate hikes could be necessary.
Financial institutions are increasingly aligning with this outlook. Reports indicate that major banks, including Goldman Sachs, Citi, and Barclays, now expect another ECB rate increase in December. Financial markets are heavily backing this scenario, with LSEG data pricing in a 94% probability of a quarter-point hike in December, while Citi projects an additional rate increase extending into March 2027.
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.